Doingbusiness in 200 5 Remo v i n g O b s t a c l e s to G rowth TeAM YYePG Digitally signed by TeAM YYePG DN: cn=TeAM YYePG, c=US, o=TeAM YYePG, ou=TeAM YYePG, email=yyepg@msn.com Reason: I attest to the accuracy and integrity of this document Date: 2005.02.15 05:39:33 +08'00' R em o v i n g O b s t a c l e s t o Growth Doing Business in 2005 A copublication of the World Bank, the International Finance Corporation and Oxford University Press © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, D.C. 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. 1 2 3 4 08 07 06 05 A copublication of the World Bank, the International Finance Corporation and Oxford University Press. 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Removing obstacles to growth: an overview 1 Measuring with impact 9 Starting a business 17 Hiring and firing workers 25 Registering property 33 Getting credit 41 Protecting investors 49 Enforcing contracts 59 Closing a business 67 References 75 Data notes 79 Doing Business indicators 89 Country tables 98 Acknowledgments 133 Contents Doing Business in 2005 is the second in a series of annual reports investigating the scope and manner of regulations that enhance business activity and those that constrain it. New quantitative indicators on business regulations and their enforcement can be compared across 145 countries—from Albania to Zimbabwe—and over time. Doing Business in 2004: Understanding Regulation presented indicators in 5 topics: starting a business, hiring and firing workers, enforcing contracts, getting credit and closing a busi- ness. Doing Business in 2005 updates these measures and adds another two sets: registering property and protecting investors. The indicators are used to analyze economic and social outcomes, such as productivity, investment, informality, corruption, unemployment, and poverty, and identify what reforms have worked, where and why. 1 The past year has been good for doing business in 58 of the 145 Doing Business sample countries. They simplified some aspect of business regulations, strengthened prop- erty rights or made it easier for businesses to raise fi- nancing. Slovakia was the leading reformer: introducing flexible working hours, easing the hiring of first-time workers, opening a private credit registry, cutting the time to start a business in half and, thanks to a new collateral law, reducing the time to recover debt by three-quarters. Colombia was the runner-up. Among the top 10 reformers, 2 other European Union entrants— Lithuania and Poland—significantly lightened the bur- den on businesses. India made progress in improving credit markets. Five other European countries—Belgium, Finland, Norway, Portugal, and Spain—reduced the cost of doing business and entered the top 10 list (table 1.1). The major impetus for reform in 2003 was compe- tition in the enlarged European Union. Seven of the top 10 reformers were incumbent or new European Union members. Thirty-six of 89 reforms—in starting a bus- iness, hiring and firing workers, enforcing a contract, getting credit and closing a business (topics in Doing Business in 2004 and 2005)—happened in EU countries. Reforms in registering property and protecting investors (new topics in Doing Business in 2005) are also taking place fast in the EU. Accession countries reformed ahead of the competitive pressures on their businesses in the larger European market. Incumbent members reformed to maintain their advantage in the presence of many low-wage producers from accession countries, produc- ers that would now compete with them on equal terms. Yet progress was uneven. Fewer than a third of poor countries reformed 1 . And those reformers concentrated on simplifying business entry and establishing or im- proving credit information systems (figure 1.1). Almost no reforms took place in making it easier to hire and fire workers or in closing down unviable businesses. Across regions, African countries reformed the least. Many of the reforms in poor countries were spurred by the desire of governments and donors to quantify the impact of aid programs (figure 1.2). The main suc- cess story is that business start-up is now easier in borrowers from the International Development Associ- ation (IDA)—encouraged by performance targets set in the 13th IDA funding round and by the Millennium Removing obstacles to growth: an overview What are the findings? What to reform? Which myths to dispel? What to expect next? TABLE 1.1 Top 10 reformers in 2003 Reforms affecting Doing Business indicators on: Hiring Starting a and Enforcing Getting Closing a Country business firing contracts credit business Slovakia ✓✓✓✓ Colombia ✓✓✓ Belgium ✓✓ ✓ Finland ✓✓✓ India ✓✓✓ Lithuania ✓✓✓ Norway ✓✓ Poland ✓✓ ✓ Portugal ✓✓ ✓ Spain ✓✓✓ Note: The table identifies all reforms that took place in 2003 and had a measurable effect on the indicators constructed in this report. Countries are listed alphabetically, with the exception of Slovakia, the leading reformer, and Colombia, the runner-up. Source: Doing Business database. 2 DOING BUSINESS IN 2005 Challenge Account, an initiative of the United States government. 2 Measuring the initial burdens and the progress with reforms also spurred reforms in the Euro- pean Union, labor reform in Colombia and bankruptcy reform in India. Lithuania and Slovakia broke into the list of the 20 economies with the best business conditions as measured in this year’s report. 3 New Zealand tops the list, followed by the United States, Singapore, Hong Kong (China) and Australia (table 1.2). Among developing countries, Bots- wana and Thailand scored best. Latvia, Chile, Malaysia, the Czech Republic, Estonia, South Africa, Tunisia and Jamaica follow. At the other end of the spectrum, 20 poor countries—four-fifths of them in sub-Saharan Africa— make up the list of economies with the most difficult business conditions. The list may change somewhat next year because of reforms and because new topics will be added to the rankings. Being in the top 20 on the ease of doing business does not mean zero regulation. Few would argue it’s every business for itself in New Zealand, that workers are abused in Norway or that creditors seize a debtor’s assets without a fair process in the Netherlands. Indeed, for protecting property rights, more regulation is needed to make the top 20 list. All the top countries regulate, but they do so in less costly and burdensome ways. And they focus their efforts more on protecting property rights than governments in other countries. If Australia needs only 2 procedures to start a business, why have 15 in Bolivia and 19 in Chad? If it takes 15 procedures to enforce a contract in Den- mark, why have 53 in Lao PDR? If it takes 1 procedure to register property in Norway, why have 16 procedures in Algeria? And if laws require all 7 main types of disclosure to protect equity investors in Canada, why do those in Cambodia and Honduras provide none? FIGURE 1.1 More reforms in rich countries OECD high income East Asia & the Pacific Latin America & the Caribbean Middle East & North Africa Europe & Central Asia South Asia Sub- Saharan Africa Note: Reforms affecting Doing Business indicators. Source: Doing Business database. Number of reforms by region What was reformed Shares of reforms by topic Starting a business Credit information Enforcing contracts Closing a business Hiring and firing 24% 25% 15% 18% 18% Reforms in rich countries Starting a business Credit information Enforcing contracts Closing a business 52% 25% 4% 19% Reforms in poor countries 26 26 11 8 7 6 5 Source: Doing Business database. FIGURE 1.2 What gets measured gets done Reduction in time and cost for business start-up, 2003–04 Level in 2003 2004 All other countries TIME COST TIME COST TIME COST EU members IDA borrowers –5% –10% –15% START-UP MEASURED Top IDA reformers Ethiopia Benin Nicaragua Mongolia Moldova Top EU reformers France Spain Slovakia Belgium Finland TABLE 1.2 Top 20 economies on the ease of doing business 1 New Zealand 11 Switzerland 2 United States 12 Denmark 3 Singapore 13 Netherlands 4 Hong Kong, China 14 Finland 5 Australia 15 Ireland 6 Norway 16 Belgium 7 United Kingdom 17 Lithuania 8 Canada 18 Slovakia 9 Sweden 19 Botswana 10 Japan 20 Thailand Note: The ease of doing business measure is a simple average of the country’s rank- ing in each of the 7 areas of business regulation and property rights protection mea- sured in Doing Business in 2005. Source: Doing Business database. REMOVING OBSTACLES TO GROWTH: AN OVERVIEW 3 What are the findings? The analysis leads to 3 main findings: • Businesses in poor countries face much larger regu- latory burdens than those in rich countries. They face 3 times the administrative costs, and nearly twice as many bureaucratic procedures and delays associated with them. And they have fewer than half the protections of property rights of rich countries. • Heavy regulation and weak property rights exclude the poor from doing business. In poor countries 40% of the economy is informal. Women, young and low-skilled workers are hurt the most. • The payoffs from reform appear large. A hypotheti- cal improvement to the top quartile of countries on the ease of doing business is associated with up to 2 per- centage points more annual economic growth. Businesses in poor countries face much larger regulatory burdens than those in rich countries It takes 153 days to start a business in Maputo, but 3 days in Toronto. It costs $2,042 or 126% of the debt value to enforce a contract in Jakarta, but $1,300 or 5.4% of the debt value to do so in Seoul. It takes 21 procedures to register commercial property in Abuja, but 3 procedures in Helsinki. If a debtor becomes insolvent and enters bankruptcy, creditors would get 13 cents on the dollar in Mumbai, but more than 90 cents in Tokyo. Borrowers and lenders are entitled to 10 main types of legal rights in Singapore, but only 2 in Yemen. These differences persist across the world: the coun- tries that most need entrepreneurs to create jobs and boost growth—poor countries—put the most obstacles in their way (figure 1.3). The average difference between poor and rich countries on Doing Business cost indicators is threefold. Rich countries score twice poor ones on in- dicators relating to property rights—enforcing contracts, protecting investors and legal rights of borrowers and lenders. Latin American countries have very high regula- tory obstacles to doing business. But African countries are even worse—and African countries reformed the least in 2003. Heavy regulation and weak property rights exclude the poor from doing business In The Mystery of Capital, Hernando de Soto exposed the damaging effects of heavy business regulation and weak property rights. With burdensome entry regulations, few businesses bother to register. Instead, they choose to oper- ate in the informal economy. Facing high transaction costs to get formal property title, many would-be entrepreneurs own informal assets that cannot be used as collateral to obtain loans. De Soto calls this “dead capital.” The solu- tion: simplify business entry and get titles to property. But many titling programs aimed at bringing assets into the formal sector have not had the lasting impact that reformers hoped for. Doing Business in 2005 helps explain why. While it is critical to encourage registration of assets, it is as important—and harder—to stop them from slipping back into the informal sector and to use their formal status to gain access to credit. Registering property—a new topic in this year’s re- port—explains that when formalizing property rights is accompanied by improvements in the land registry, collateral registry, the courts, and employment regula- tion, the benefits are much greater. If the formal cost of selling the property is high, titles will lapse by being traded informally. In Nigeria and Senegal that cost amounts to about 30% of the property value. And even when a formal title is well-established, it will not help to increase access to credit if courts are inefficient, collat- eral laws are poor and there are no credit information systems, because no one would be willing to lend. Add to this rigid employment regulation, and few people will be hired. Women, young and low-skilled workers are hurt the most: their only choice is to seek jobs in the informal sector (figure 1.4). Two examples. Nerma operates a small laboratory in Istanbul. She feels strongly about providing job opportu- nities for women but says employment legislation dis- FIGURE 1.3 More regulatory obstacles in poor countries Ratio of poor to rich countries Source: Doing Business database. Cost to fire a worker Cost to enforce contracts Minimum capital for start-up Years to go through insolvency Days to register property Days to start a business Legal rights of borrowers and lenders Contract enforcement procedures Investor protections: disclosure index Higher costs More delays Less protection of property rights 1.6 3.0 4.2 1.9 1.8 2.2 –1.6 –1.4 –2.0 4 DOING BUSINESS IN 2005 courages it. When women marry they are given a year to decide whether to leave their job and if they choose to go, the employer is required to pay a severance payment based on years of service. And, if the business experiences a drop in demand, it costs the employer the equivalent of 112 weeks salary to dismiss a redundant worker. With such rigid regulation, employers choose conservatively. Only 16% of Turkish women are formally employed. Rafael runs a trading business in Guatemala. A large customer refuses to pay for equipment delivered 2 months earlier. It would take more than 4 years to resolve the com- mercial dispute in the courts and even then the outcome is uncertain. Rafael has no choice but to negotiate with the customer and ends up getting only a third of the amount due. With no money to pay his taxes, Rafael closes the busi- ness and goes informal. He is not alone. More than half of economic activity in Guatemala is in the informal sector. Payoffs from reform appear large A hypothetical improvement on all aspects of the Doing Business indicators to reach the level of the top quartile of countries is associated with an estimated 1.4 to 2.2 per- centage points in annual economic growth (figure 1.5). 4 This is after controlling for other factors, such as income, government expenditure, investment, education, infla- tion, conflict and geographic regions. In contrast, im- proving to the level of the top quartile of countries on macroeconomic and education indicators is associated with 0.4 to 1.0 additional percentage points in growth. How significant is the impact of regulatory reform? Very. Only 24 of the 85 poor countries averaged at least 2% growth in the last 10 years. China, the most promi- nent among the 24, scores higher on the ease of doing business than Argentina, Brazil, Indonesia or Turkey. Women’s share of private sector employment Countries ranked by rigidity of employment index, quintiles Least rigid Most rigid Countries ranked by procedures to register property, quintiles FIGURE 1.4 Complex regulations exclude the disadvantaged from doing business Informal sector share of GDP Note: Relationships are significant at the 5% level, controlling for income per capita. Source: Doing Business database, World Bank (2004a), WEF (2004). Greater share Lesser share Fewest procedures Most procedures Greater share Lesser share Additional annual growth from a hypothetical improvement to the top quartile on the ease of doing business Countries ranked by ease of doing business, quartiles Most difficult Actual growth Implied additional growth Least difficult FIGURE 1.5 Ease of doing business is associated with more growth Note: Analysis controls for income, government expenditure, primary and secondary enrollment, inflation, investment, regions and civil conflict. Relationships are significant at the 5% level. Source: Doing Business database, Djankov, McLiesh and Ramalho (2004). +2.2% 2.6% 1.4% 1.3% 1.0% +1.4% +1.4% Source: Doing Business database, UNDP (2004). FIGURE 1.6 Simpler business regulation, more human development 0 20406080100120 0.8 0.4 1.0 0.6 0.2 Ease of doing business Human development index REMOVING OBSTACLES TO GROWTH: AN OVERVIEW 5 Economic growth is only one benefit of better busi- ness regulation and property protection. Human devel- opment indicators are higher as well (figure 1.6). Gov- ernments can use revenues to improve their health and education systems, rather than support an overblown bureaucracy. The gains come from two sources. First, businesses spend less time and money on dealing with regulations and chasing after scarce sources of finance (figure 1.7). Instead, they spend their energies on producing and mar- keting their goods. Second, the government spends fewer resources regulating and more providing basic social ser- vices. Sweden, a top 10 country on the ease of doing busi- ness, spends $7 billion a year or 8% of the government budget, and employs an estimated 100,000 government officials to deal with business regulations. 5 The United Kingdom spends $56 billion a year, or nearly 10% of the budget, to administer business regulation. 6 The Nether- lands spends $22 billion or 11% of its budget. Belgium, $10 billion. Norway, $6 billion. 7 In both countries, this amounts to about 9% of government spending. What would happen if these countries were to re- duce red tape by a moderate 15%? The savings would amount to between 1.2% and 1.8% of total government expenditures, or approximately half of the public health budget. Some governments are more ambitious. In 2002 the Dutch government set a goal of cutting expenditures on administrative burdens by 25% by 2006. Actal, an in- dependent agency for cutting red tape, estimates that $2 billion has already been saved by doing impact assess- ments before new regulations reach the parliament. The Belgian government has set the same 25% reduction as a goal. Denmark, France, Italy and Norway have also set quantitative goals for reducing red tape. FIGURE 1.7 High costs of dealing with business regulation Source: World Bank investment climate assessments. 61 India Ecuador KenyaTanzaniaAlbania Ukraine CambodiaBrazil Percentage of firms reporting that government regulations occupy 10% or more of senior management time 56 55 51 49 44 43 37 What to reform? The benefits of regulatory reform are likely to be even greater in developing countries, which regulate more. Yet few governments are eager to reform, arguing that they have limited capacity, that it takes a long time and that it costs a lot. In 2003 countries that scored the lowest on the ease of doing business measure reformed at one third the rate of countries in the top quartile. Reform involves simplification. Governments would have more capacity and more money if they reformed. With so many examples of good practice to learn from, there is no reason to wait (table 1.3). Imagine Namibia wants to be among the best in reg- ulating business entry. A delegation from the company registrar’s office could visit Australia, Canada or New Zealand and see how the process works there. To learn how reforms take place, it could travel to Serbia and Montenegro, which just passed legislation to move regis- tration out of the courts—and to Italy, which made the entry process much easier by establishing a single access point. Or one could visit countries nearby—Botswana, South Africa and Uganda all have well-functioning busi- ness entry. The same approach could be followed for re- forms of regulations of labor, credit, property, corporate governance, courts and bankruptcy. To prioritize reform, governments can start by mea- suring regulatory costs and identifying the biggest oppor- tunities for improvement. Belgium did so by introducing an annual survey of enterprises on the main regulatory obstacles they face. A total of 2,600 businesses participate in the survey, and the results are reported to the parlia- ment. The process identified problems in company regis- tration—a main reason for the 2003 reform—and in business licensing, where reform is ongoing. Actal, the in- dependent agency in the Dutch government, performs cost-benefit analysis of regulatory proposals. Along with similar agencies in Denmark and Korea, it is among the best in measuring and reducing red tape. There are suc- cess stories in developing countries too. In Mozambique and Vietnam, the government regularly seeks advice from the business community on priorities for reform. [...]... a business and –19% on cost to start a business 3 The ease of doing business measure is the simple average of country rankings (from 1 to 135) in each of the 7 topics covered in Doing Business in 2005 The ranking for each topic is the simple average of rankings for each of the indicators—for example the starting a business ranking averages the country rankings on the procedures, days, cost and minimum... reform takes place Doing Business started by studying what entrepreneurs go through in starting a business, hiring and firing workers, enforcing contracts, registering property, getting credit, protecting investors and closing a business With time, the project is building more information on reforms— what motivates them, how to manage them and what their impact is Coming in Doing Business in 2006 are studies... largest business city and the benchmark for the Doing Business cross-country indicators, the alvará requirement drives up the total days Two characteristics define good indicators First, they capture the real constraints to doing business Second, they are understood by policymakers, business leaders, journalists and development experts and are easy to act upon Doing Business in 2005 introduces changes to. .. http://rru.worldbank.org/doingbusiness/ methodology and to the procedure by procedure data on the Doing Business website For example, in contesting the Starting a Business data on Albania, the reader should look at http://rru.doingbusiness.org/ doingbusiness/exploretopics/startingbusiness/economies/albania.pdf SEBRAE (2000), World Bank Investment Climate Assessments, available at http://www.worldbank.org/privatesector/ic/ic_country_report.htm... for reform and in designing improvements to indicators Doing Business in 2005 presents new indicators on collateral laws to address how creditors enforce their rights outside of bankruptcy Doing Business in 2006 will report whether these improvements help reformers The use of various indicators in allocating aid—for the United States’ grants under the Millennium Challenge Account, for the International... procedures in setting up a one-employee garment fac- tory in the outskirts of Lima It took 289 days and $1,231 for the business to legally start operations Doing Business is a time-and-motion study which measures, across 145 countries, the obstacles faced by an entrepreneur performing standardized tasks: starting a business; hiring and firing workers; obtaining business licenses; getting credit; registering... in moving to the formal sector, such as greater access to credit and to courts 7 FIGURE 1.8 Heavier regulation—more informality Informal sector share of GDP Greater share Lesser share Most difficult Least difficult Countries ranked by ease of doing business, quintiles Source: Doing Business database What to expect next? Three other areas of the business environment are being researched First, dealing... ways to ease business start-up, Doing Business in 2004 recommended single registration forms, a single company identification number, a general-objects clause in the articles of incorporation and eliminating court involvement in the registration process This year’s analysis shows that these reforms work The update also asked local Doing Business partners to name the 5 biggest regulatory and administrative... The number of procedures to start a business fell from 11 to 7 Changes in the Slovak Company Law introduced a time limit on business registration, cutting the days to start a business from 98 to 52 Bosnia and Herzegovina modified the Law on Business Companies, reducing the minimum capital requirement from 10,000KM to 2,000KM and setting a statutory time limit for registration In May 2004 Poland adopted... specifying the regulatory reforms under way, supports each indicator set The use of local knowledge distinguishes Doing Business from several other existing indicators, such as the ones produced by the Heritage Foundation, Freedom House, the International Country Risk Guide and Institutional Investor, constructed by experts living in other countries Transparent and easily replicable, Doing Business . reforms in starting a bus- iness, hiring and firing workers, enforcing a contract, getting credit and closing a business (topics in Doing Business in 2004 and 2005) —happened. Albania to Zimbabwe—and over time. Doing Business in 2004: Understanding Regulation presented indicators in 5 topics: starting a business, hiring and firing